Market Changes Challenge Copper

Editor’s note: Four copper industry executives offered their insights on the past, present and future of the red metals market during the Copper & Brass Servicenter Association’s annual meeting last month in Aventura, Fla. Featured speakers included: Robert Brookes Jr., president, E. Jordan Brookes Co., Santa Fe Springs, Calif.; Joseph Walton, president and CEO, Williams Metals & Welding Alloys Inc., Wayne, Pa.; Daniel Becker, president, AJ Oster Co., Warwick, R.I.; and Frank Kevane, CEO, Copper and Brass Sales, Southfield, Mich. The panel was moderated by Metal Center News Editor-in-Chief Tim Triplett.

Sidebars and Tables:

• Red Metals Markets 'Not All Bad'

Record-high metal prices, consolidation among suppliers and competitors, weak demand in key markets and general concern about the economy brought a cautionary mood to last month’s CBSA conference. CBSA members—both mills and service centers—clearly feel challenged by conditions in the copper market.

Offering a historical perspective, panelist Bob Brookes of E. Jordan Brookes Co. noted that today’s market is a far cry from the bullish scenario of a decade ago.

“Service centers were adding processing equipment and inventory to keep up with demand. Big distributors were expanding by buying midsize companies. Personal relationships with mills and customers were the keys to distributors’ success. Copper was priced around a dollar. It was a time of euphoria that was projected to never end.”

Today, consolidation continues, but big distributors are swallowing little firms at bargain prices. There is a blurring of business lines between mills and distributors, and therefore a blurring of relationships. Cost-cutting demands have truncated training programs and application development. Weaker companies are no longer reinvesting in the future, but just trying to stay solvent. Everyone wants and needs the order, Brookes said. “There is a minimal collaborative effort between mills, distributors and customers today. Most are inwardly focused on protecting their own companies.”

With the use of the Internet, distributors are selling opportunistically outside of historical territories. Big customers are leveraging all available sources for better prices, reducing distributor margins. With the price of copper over $4 per pound, companies at all levels have been forced to reduce inventories, and in some cases to seek substitute materials.

With the consolidation of independent distribution has come a tremendous loss of industry and material knowledge, Brookes said. In many cases, the classic sales engineer who earned his business by solving customers’ problems has been replaced by order-takers who provide little service beyond accepting the order at the lowest price. Technical support has been pushed off to the website.

“Purchasing departments place orders based on price alone. They expect that quality and delivery performance is a given. The term customer service is becoming arcane,” Brookes said. “We each need to decide which business model is best for our future. Yes, EDI is efficient, but at what cost? Technical support is a key component to the future health of our industry.”

Pointing to unfavorable economic conditions that could persist for some time, AJ Oster’s Dan Becker urged the crowd to be realistic and conservative in their expectations for business in the next few years. “Several factors will continue to create challenging market circumstances and the high cost of working capital that we see. Experts say the economy is naturally self-correcting. However, the effects of the weak dollar are working against that.”

For example, consider a carmaker that builds vehicles in Japan and sells them in the United States. Every time the dollar weakens and the yen strengthens, the carmaker spends more expensive yen to build the cars and receives less valuable dollars in return. This should have a natural tendency to bring such manufacturing back to the United States, Becker noted, but that’s not happening because a lot of production offshore is in countries, particularly China, where the exchange rate is controlled by the government.

“China continues to buy up so much raw material, using funds we give them through Wal-Mart, that the huge current account imbalance continues to worsen. There is a natural momentum there that is difficult to stop,” he added.

Becker decried the lack of U.S. government support for American manufacturing and the high-paying jobs it creates throughout the economy. “We are competing against countries that have national manufacturing policies. The fact of the matter is we don’t have a manufacturing policy. It’s all about politics. Manufacturing is 14 percent of GDP. Farming is about 2.5 percent. Yet we have all kinds of government programs to support farming, and nobody messes with them.”

The high price of copper brings added urgency to the need to streamline the distribution channel, from mill to distributor to end-user. Because working capital is so much more costly, any inefficiencies are magnified, Becker said. “The cost of raw material has changed everything we do, in terms of the working capital we employ. What really concerns me is the drive to push back payment terms. Today, your CFO may say you have a $400,000 bad-debt problem. A few years ago, when copper was just a dollar, that might have been a $150,000 bad debt. My point is that as an industry, we have to recognize the danger here.”

Joe Walton at Williams Metals noted that there are three ways consolidation can affect suppliers, and two of them are negative.

If large customer A merges with small customer B, and your company supplies to both, you now have to sell both at the lower price and you’ve lost margin. If you previously sold to the smaller B and not the larger A, you will probably lose the business altogether to A’s predominant supplier. It is only in the case where you are selling A and not B that you may pick up the additional pounds.

Competitive pressures have forced the closing and divestiture of certain mill facilities, as well as cutbacks in the types of products and alloys certain mills produce. This in turn has affected how service centers source and purchase material, Walton explained. “There are limited or no domestic producers left in certain standard items—heavy brass plate, copper pipe, large-diameter copper rod and certain sizes of brass rod—which has forced buyers to source offshore or be left out of the market.”

Greater dependence on foreign sources has forced service centers to stock more material in anticipation of longer lead times for replenishment, and to assume greater price risk.

“Now I have a 14-week lead time to consider. I have to keep two to three months’ supply on the floor with more in the pipeline, while prices can fluctuate 40 to 50 cents a pound while the material is floating on the high seas. There’s more risk and cost concern for distribution.”

Certainly, service centers don’t only source overseas out of necessity. When they can find a product of comparable quality at a more competitive price, some opt to take the risk in exchange for a potentially better margin. “In my mind, the market changes have forced red metals distribution, which was behind the curve in comparison to the aluminum and steel industries, to enter into a more global market,” Walton said.

Relations between distributors and mills are sometimes strained by the new market realities.

Service center and fabricator partnering and account sharing have changed. “We have long used mill partners for technical feedback and support, but the joint sales call that had historically taken place has subsided,” Walton said. “The majority of the customers now significant enough to warrant a joint call are of the size they should probably be buying mill direct. The line has blurred in terms of who should be pursuing that account. For joint sales calls to make sense, we need a secure relationship with the supplier and an equally secure one with the customer—ideally because we provide a service that cannot be provided at the mill level.”

On the distribution side, consolidation has redefined the standard tiers of service centers, Walton continued. “The small and medium have stayed consistent, but some large distributors have grown into a mill mentality—one salesman covering five states, bringing a pound-driven approach to the market that has made a commodity of more products, cut into margins and created a more difficult environment to make a profit.”

Walton sees an opportunity for mid-tier distributors to gain through more face-to-face contact with customers in pursuit of small-volume sales that large distributors can’t justify. “Most customers don’t want to be sole-sourced after bad experiences from previous tightenings and shortages. Even the role of backup in some of these large accounts is a good customer for some mid-tier guys. With more flexibility, quicker response time and a local relationship, I think the opportunity is there for mid-tier distributors to grow their market share tremendously in the coming years.”

Prompted by lean manufacturing efforts and the higher cost of maintaining inventory, more customers are seeking fabrication services from distributors—which poses both opportunities and challenges, Walton noted. “Customers are coming to us with drawings and saying, ‘sell us this finished part.’ The distributor’s role of warehouse, cut and ship has expanded to include partnerships with a variety of specialty machine shops so that we can provide the service that customers now expect.

“The downside is that we have now picked up this administrative work accounting for the movement of the material, the finished goods, the scrap return and the additional freight costs. After that, we are on the hook for someone else’s work. The upside, of course, is that it is a bigger ticket sale. We are marking up the material and also making money on the machining. This leads to a stronger relationship with the customer as we differentiate ourselves from competitors who just offer a commodity. It also makes it that much harder for anyone coming in off the street to take the business away. The two-way relationship with the fab shop as both a customer and a supplier opens up new opportunities we didn’t have before.”

Brookes called for more open relationships between suppliers and distributors, to work together for the success of both. “Mills should not forget that distribution brings the resources of thousands of salespeople to bear selling their products—an asset that is often forgotten in the quest to meet the monthly budget.”

Both mills and distributors are guilty of becoming shortsighted and skimping on value-added sales training and market application development, he said. “This is hard work, even harder to place a dollar value on, but it gives you vision and some control over your future. True development work is an expense in this year’s budget, but it is an investment in the future of your company, the customer and the industry.”

Red Metals Markets 'Not All Bad'

Despite all the turmoil in the economy, companies such as Copper and Brass Sales have seen steady or increasing shipments vs. a year ago. “We all seem to hear about how bad things are, but we just don’t see it in our daily business. We may have a little softening, but I think we need to remain optimistic,” said panelist Frank Kevane, who offered his assessment of key copper and brass markets.

“Of the major market segments that we serve, automotive is the most negative. Sales in mature markets such as the U.S., Europe and Japan will stagnate at best this year. J.D. Power’s revised forecast for 2008 has auto at 14.9 million units, down from 15.7 million last year.”

Despite the slumping U.S. housing market, increased demand for electricity to reduce dependency on imported fossil fuels will continue to support growth in power distribution. The output of U.S. electric utilities is expected to grow 7 percent in the next year.

The semiconductor industry in 2007 was characterized by excess capacity and high demand. 2008 will be characterized by better capacity balance but some softening demand. The net result is a forecasted revenue increase of about 2 percent, Kevane reported.

The telecommunications industry is entering a transition phase where the current telephone systems are being converted to voice over internet technologies and the television broadcast industry is migrating to high-definition technologies. “These changeovers will require replacement of a substantial portion of the equipment used today, representing a substantial opportunity for all of us. The outlook for 2008 in telecommunications still remains very good,” Kevane said.

In the electronics market, demand for digital TVs and accessories should increase significantly due to regulations requiring the conversion of all analog TV transmissions to digital by 2009. U.S. consumption of electronic entertainment devices, musical instruments and home computers were forecasted to grow by 4 percent in 2008, but with consumer confidence waning, that may be optimistic, Kevane said.

The outlook is mixed for capital spending, though oil and gas and aerospace remain bright spots. Domestic air carriers as a group have pent-up demand for over 1,000 new aircraft over the next five years as the commercial fleet ages to an unhealthy level averaging nearly 25 years. The outlook for aerospace products is projected to grow by 6 percent in 2008.